Britain’s offshore havens asked to bump up taxes

October 29, 2009

By Huw Jones
LONDON, Oct 29 (Reuters) – Britain’s overseas financial havens should bump up taxes to wean their economies off credit crunch hit banking, insurance and funds services, a government-commissioned report said on Thursday.

Michael Foot, a former Bank of England director who helped to set up the Financial Services Authority, was asked by the British government to see how the economies of nine of the country’s overseas territories and crown dependencies can be made more sustainable and resilient to shocks like the financial crisis.

“The smallest economies are particularly exposed to the downturn, but none of the nine jurisdictions I have reviewed can afford to be complacent,” Foot said in his report.

Many of the offshore centres have built up financial services industry by levying low or zero taxes and reversing this policy could see business move elsewhere.

“Some now face difficult decisions and will need to look afresh at options for controlling public expenditure and increasing revenue,” Foot said.

Deloitte, a consultancy which contributed to the report, said there was a compelling case for the jurisdictions to introduce value added tax on goods and services as part of efforts to broaden out revenue.

Some of jurisdictions reviewed, such as Bermuda, have no taxes on income, profits and capital gains, with income coming from import duties and licence fees.

The UK government signalled its backing for the report.
“This report sends a strong signal to overseas financial centres that they must ensure that they have the correct regulation and supervision in place, while also ensuring their tax bases are more diverse and sustainable to withstand economic shocks,” Stephen Timms, a junior UK finance minister, said.

Britain also needs to comply with commitments it collectively made with Group of 20 partners to crack down on offshore tax havens and curb tax evasion and financial crime.

The financial crisis has raised concerns that Britain may end up having to foot the bill for any failures of firms in dependencies with large financial sectors.

The study looked at nine dependencies and territories with significant financial sectors such as Jersey, Guernsey, Isle of Man, Bermuda, Cayman Islands, Gibraltar and British Virgin Islands whose cross-border financial flows totalled $4.8 trillion at the end of 2008.

The crown dependences provided net financing to UK banks of $332.5 billion in the second quarter of 2009, with two-thirds from Jersey alone.

The report said the nine must adhere to international standards on sharing information on tax cases, financial regulation, stopping money laundering, financing of terrorism and put their public finances on a firmer footing by diversifying their revenue.

The Cayman Islands has become the world’s top hedge funds centre with financial services making up 74 percent of the economy but its public finances fell into the red due to problems in the hedge funds industry.

The Cayman Islands said the report provided useful insights into the significance and contributions of British offshore financial centres.

“We welcome the constructive observations and recommendations put forth by the review,” McKeeva Bush, leader of government business and premier designate, said.

Jersey said the report acknowledged the important role it played in providing liquidity to UK banks and that the Channel island was performing well.

The Society of Trust and Estate Practitioners added: “The G20 needs to take account of the potential this positive role has in helping the global economy recover.”

Bermuda is the third largest reinsurance centre globally, writing nearly a third of the 2008 premium at Lloyd’s of London insurance market. Many online gambling firms are based in Gibraltar, giving them a gateway to the European Union single market.

Deloitte was unable to quantify the “tax gap” from British companies basing activities in the tax havens but said it was likely to be significantly lower than previous estimates.

Under pressure from the G20, Jersey, the Cayman Islands and the British Virgin Islands agreed this year to improve tax information sharing so they could be placed on the OECD’s “white list” of those who fully comply with global rules.

(Reporting by Huw Jones; Editing by Ruth Pitchford and Victoria Main)
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Thursday, 29 October 2009 12:12:58RTRS [nLT180855 ] {C}ENDS

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